The math is fairly simple. There are two cases: viral and non-viral.<p>The viral case is when the value you can offer to paying customers actually increases as more free users join the system. In this case, the free users are the resource and as long as the revenue you can extract from their added value exceeds the cost to support them, you can do freemium profitably.<p>The second case is non-viral and is where most people are. Here, the basic premise is that the free users may A) become paying customers or B) attract paying customers through word-of-mouth/scale halo effect.<p>In both cases, you need to estimate the lifetime cost of a free user. Even if it's only $0.25 per year, it will be <i>something</i> and is important. You will also need to estimate the lifetime profit of a customer (lifetime value minus lifetime cost). Don't forget user/customer support costs and overhead.<p>For case 2A, you then calculate the conversion rate for free users. If the lifetime profit of a customer exceeds the lifetime cost of a free user divided by the conversion rate, you win. If not, free users are a drag on profitability and not worth it.<p>For case 2B, you again calculate the lifetime profit of a customer and compare vs the lifetime cost of free users divided by the expected referral rate free users generate. If the profit exceeds the referral cost, you win. Otherwise, again, free users are not worth it.<p>Obviously, the above is very rough overview, and in real life there are many additional complexities. There are various ways these cases may mix, the functions may not be linear, etc. But in the end, it's just math and you can guestimate if freemium is economical for your business.
Great article, really. The hard ones are the edge cases. If you can answer these questions in a clear-cut way then you probably already know whether freemium is for you or not, if you're on the edge the only answer is probably try and see where it leads you, stay flexible and you might be able to push an edge case in to a 'yes'. But be prepared to do a lot of work.<p><a href="http://jacquesmattheij.com/Handbook+Freemium" rel="nofollow">http://jacquesmattheij.com/Handbook+Freemium</a> <- shameless plug.
<i>What is your market like? If you are targeting a large unmet need, you should make your product free.</i><p>I'd argue the opposite. Get in there and start charging right away. Get as many customers as you can before some buffoon comes in and gives it away for free. If you're lucky, you'll establish that the market price is > 0, and future competitors will charge in a likewise manner.
I like the first comment on that:<p><i>You missed what I consider the most important question of freemium -- does having a large user base, in and of itself, offer value to the users. I come from the dating site world. Let me tell you, on any social site, if you have a million free users and 10,000 paying users, you're fine; if you have 10,000 paying users and no free users, you're dead: the paying users have nobody to talk to.</i>
The second question sounds like a restatement of the first. If users find your service becomes more valuable over time, why would they stop using it? (Conversely, if users stop using your service, did they really find it increasingly valuable?)